Manufacturing Flexes Its Regional Muscles

South Texas cities are finding success in retaining and attracting globally competitive manufacturing facilities 
By Lisa Bastian, CBC

Behind iconic images portraying the Texas economy powered by cattle, oil wells and dude ranches alone is this reality: Manufacturing matters in the Lone Star state, and is a vital part of the nation’s industrial backbone.

The Federal Reserve Bank of Dallas (FRBD) monitors this sector, and gathers statistics about it through monthly surveys of Texas manufacturers and other research tools.

According to FRBD economist Fiona Sigalla, “Texas has emerged as one of the nation’s fastest-growing manufacturing hubs. Between 1990 and 2005...the state’s factory output grew an average of 5.8 percent a year, eclipsing all other major manufacturing states.”
In 2005 alone, the state produced $126.8 billion worth of manufactured goods (8.3 percent of the U.S. total) and shipped Texas-made products valued at $463.9 billion.

Another group keeping tabs is the Texas Workforce Commission (TWC). In 2005, the agency says Texas was ranked as the No. 1 state by export revenues (the fourth consecutive year), and that NAFTA trading partners Mexico and Canada made up half of those exports. Texas also ranked second behind California in factory production.

Recent FRBD research reveals Texas also is responsible for a significant share of U.S. production of petroleum and coal products; activity reflecting the muscular refining industry. It also contributes about 10 percent of the country’s computer/electronics products and nonmetallic mineral products.

So how many Texans work in manufacturing? Some people may be surprised to learn that as of year-end 2005, it was estimated about 9 percent — or 892,000 — of the state’s non-agricultural workers were employed in this sector (source: TWC).

Cleary the industry is a powerful engine for the Texas economy. And every day, in communities across the state, manufacturers from around the world are inquiring about how they can harness its incomparable advantages of location, pro-business climate and available young workforce.

For most San Antonio citizens, the word “manufacturing” immediately calls to mind Toyota Motor Manufacturing Texas, that sector’s most high-profile corporate citizen. The company’s $1.2 billion investment in a new Tundra truck manufacturing plant in the Alamo City has created 2,000 direct jobs. It’s expected about 150,000 trucks eventually will be made here annually.

In addition to Toyota’s workforce, another 2,100 jobs exist thanks to 21 Tier 1 suppliers who reside in the company’s first-ever supplier park. They’ve invested a combined $300 million in the region, says Steve Nivin, chief economist for the City of San Antonio’s economic development department.

“They’re part of the ‘job multiplier’ effect manufacturers typically have on a community,” he points out. These Tier 1 firms engage in just-in-time manufacturing of supply seats, bumpers, doors and the like to Toyota after assembling them with parts from Tier 2, 3 and 4 companies.
San Antonio’s major industries are biotech, tourism, aerospace, military and real estate. In the smaller manufacturing sector the city’s focus increasingly has been on attracting high-tech operations; a move particularly important if area firms are to do well in a globally competitive market. Nivin says that before Toyota came, the city had “very little auto manufacturing activity.” 

While the Japanese car company has certainly had an impact on the local economy, its 4,100+ direct/indirect jobs make up only a small percentage of the overall manufacturing workforce.

Current state workforce stats reveal San Antonio is home to 1,100 manufacturers employing 48,554 people, and that about 75 percent of those firms have 20 or fewer workers. In total, Nivin estimates sector employees represent roughly 6 percent of the 820,600 non-farm workers in metro San Antonio.

By year-end 2001 total manufacturing employment was 53,614, and by year-end 2006 it was 48,554, he says.

“I think people have the impression that if you get Toyota all of a sudden you have a manufacturing industry. Has Toyota contributed positively [to the sector]? Absolutely, and in many other areas, too. For example, they located on the South Side of town, which hasn’t seen much growth but now is being revitalized thanks to the plant.”

One of the most important contributions Toyota has made, he says, “is the fact it has raised the status of San Antonio in the economic development community nationwide and among companies looking to relocate or expand their operations. When you have a company of that stature making that level of investment, people take notice. And yes, ever since their arrival, interest has picked up.”

Mike Harris is president of the 456-member San Antonio Manufacturers Association (SAMA). According to that group’s research, the biggest sub-category of manufacturing here includes printing, publishing and allied industries (16 percent of the total); followed by industrial/commercial machinery and miscellaneous work (9.5 percent); then fabricated metal products (9.1 percent).

“The ‘big dogs’ include Toyota, Cardell Cabinetry, DPT Laboratories, the San Antonio Express News, Coca-Cola, Sino Swearingen Aircraft, SAS Shoes, Miller Curtain and HEB,” says Harris.

Dr. Richard Butler, professor of economics at Trinity University in San Antonio, has served as chair of the school’s economics department for 12 years.

One of his ongoing projects for the Greater San Antonio Chamber of Commerce is to create periodic economic impact studies (with Dr. Mary Stefl) about local sectors. This November, the academic duo will release their first-ever report about manufacturing in San Antonio and six surrounding counties.

This region’s transportation infrastructure, well-connected interstate corridors, proximity to Mexico, relatively low power and cost-of-living costs, and trained workforce are all assets Dr. Butler cites as increasingly attractive to manufacturers seeking to move products throughout North America and Latin America.   

Despite the rosy outlook, one issue exists which could hamper future manufacturing gains. It boils down to this: Can San Antonio continue to supply enough highly skilled workers to keep up with the demand?

While “the jury is still out” on the final answer, the professor says there are certainly many excellent school-based manufacturing programs in the region doing an outstanding job of training students to meet future workforce needs. (See the workforce article on page 14.)

Dr. Butler and SAMA’s Harris are big cheerleaders for those programs. However, they’re both concerned student enrollment may be hurt by an outdated perception that identifies most manufacturing as dirty sweatshops.

“The reality is that nowadays these places are quite modern,” says Harris, “with machines run by computers requiring very high-skilled workers who get very high wages. For those students who can’t or don’t want to go to college, they’re much better working environments than the local burger joints.”

How is manufacturing faring in other South Texas cities, specifically along the border? Very well, by all accounts.

“Production sharing [makes] the Texas/Mexico border one of the hottest manufacturing regions in the world,” asserts Claude Billings in a 2006 article written for Texas A&M University’s Real Estate Center, the nation’s largest publicly funded organization devoted to real estate research. (Billings is vice president of Verde Corporate Realty Services in El Paso.)

Furthermore, he points out that intense competitive pressure for Global 2000 companies to reduce costs “has positioned the U.S./Mexico border region as North America’s leading manufacturing and services platform to compete against China, India and other rapidly developing economies.”

What are key regional attractors for manufacturing and logistics facilities? Billings cites proximity to the U.S. consumer market, logistics costs and Mexico’s technical labor force. The primary driver is “production sharing,” whereby multiple countries contribute to the manufacturing of a finished product. (That explains the explosive growth of Mexico’s maquiladora
industry.)

Texas border cities such as El Paso, Laredo and McAllen “have enjoyed production sharing activity for more than 30 years,” says Billings, adding that “gateway city” San Antonio has recently become a participant. Specifically, he identifies El Paso/Juarez as the world’s largest bi-national production region.

Not surprisingly, demand for industrial space along the border and the gateway cities is increasing, and “manufacturing facilities on both sides of the border generate demand for suppliers to relocate to the region. The cost-effective production sharing capability of the U.S./Mexico border region combined with strong consumer demand in the U.S. continues to make this region attractive for Global 2000 companies.”

Take a look at Laredo, the second fastest-growing city in the U.S. thanks largely to huge NAFTA-created commercial traffic. More than 38 percent of trade and commerce activity engaged by Mexico, the U.S. and Canada is “funneled” through this metro area,  reports Grubb & Ellis, a global real estate company. With an estimated 231,470 people in Laredo and 348,387 in Nuevo Laredo, the combined bi-metro population is nearly 580,000.

According to Timothy Franciscus-Timm, industrial development specialist for the Laredo Development Foundation, about 33 percent of Laredo’s workforce is employed by government and 28 percent by the warehousing/logistics sector.

In contrast, manufacturing represents 3 percent of the workforce and employs about 2,700 people. It’s a tiny percentage, “but manufacturing is growing here,” he says. “By 2010, we’d like it to represent at least 10 percent of the workforce, or about 8,000 employees.” The vast majority are small manufacturers working in automotive, tooling and similar areas.

Laredo is concentrating on bringing in more manufacturing, and recently has seen an increase in medium-sized light manufacturing firms inquiring about the city.

“I truly think we are a ‘hidden manufacturing gem’ among the other border cites,” he explains. “We feel a need for more Tier 2, 3 and 4 manufacturing suppliers, especially in auto manufacturing. And we’d like to take more advantage of our relationships in Mexico, particularly in Nuevo Laredo.” Franciscus-Timm coyly adds that later this year Laredo’s sister city should be announcing a few manufacturing expansions.
One man who appreciates the city’s manufacturing business model is billionaire Carlos Peralta, owner of Mexico-based Grupo IUSA, a leading copper manufacturing and distributing firm. This spring the company broke ground on its 500,000-sq.-ft. Eagle Copper Tube facility, expected to be the world’s most technologically advanced copper manufacturing plant.

When completed in 2008 the “phase one” project should create about 260 direct high-paying jobs. Local officials predict it’s expected to add $100 million to Laredo’s economy — and possibly up to $400 million due to the multiplier effect.

McAllen is a Rio Grande Valley community of 123,622 people situated directly across from Reynosa, a Mexican city with one million citizens. Its location 75 miles from the Gulf of Mexico gives it a unique advantage for international commerce. Not surprisingly, in a 2005 Forbes survey of the top U.S. metro areas, McAllen ranked No. 1 in job growth and No. 2 in cost of living.

Last year about 4 percent of McAllen’s workers, or 8,400 people, were employed in manufacturing. Keith Patridge, president and CEO of the McAllen Economic Development Corporation (MEDC), confirms the sector is growing. “A lot of stars are aligning now.” 

In 2006, he says 39 manufacturers came to town while the year before 50 entered the market. During those two years new companies gobbled up a combined 8 million square feet of space. On average, Patridge estimates McAllen annually brings in 28 to 40 new manufacturers or support firms.

One reason for the upswing in interest, he says, in the new strategy of companies to “start using Mexican ports to bring in product from the rest of the world rather than the traditional U.S. East-West coasts.” MEDC found that many firms who use Reynosa in this manner “can reduce their costs 20 to 25 percent” and shorten shipment time, on average, by three days.

Nohelia Frias, a business development specialist for MEDC, says the diverse manufacturing base includes 150 plants in McAllen and 210 maquiladoras in Reynosa.

The annual economic impact of the maquiladoras here is about $824 million according to studies done on behalf of the Cities of Reynosa, McAllen and Rio Bravo and the University of Texas. Motorola, Panasonic and Black and Decker are just a few of the region’s well-known corporate residents.

As with most other border cities, there is a symbiotic relationship in place that benefits both sides of the river, In McAllen, companies tend do more light manufacturing work; are more capital intensive, and require fewer workers.

“More labor intensive companies, those who want to hire 500 or so people, will go to Reynosa due to the lower wages,” explains Frias. “The building and electricity costs are much higher, so labor offsets those costs.”

Neither side has a manufacturing cluster. “We just don’t want one sector, and so try to diversify,” she relates. ”We’re a little picky on who we like to come here.”

These days big automakers are on top on the welcome list, as one of the city’s major goals is to secure an automotive assembly plant. (The community got a taste of that action when it was considered for the Toyota plant San Antonio eventually landed.) 

Where would such a massive project be built? Frias points to the Shary Industrial Park, part of a 6,000-acre, master-planned community operated by the Hunt Brothers.

Government, tourism and the retail sector are prominent factors in the economy of Brownsville, a coastal city located at the most southern tip of Texas just outside of South Padre Island.
But manufacturing is also a major focus, particularly in the automotive sub-sector. “We have several companies that compliment each other; for example, steering wheels, dashboards, CD players,”

says Gilbert Salinas, director of communications of the Brownsville Economic Development Council. “That’s our major market. We also have a growing aerospace manufacturing sector.”

In fact, recently a national ranking by Industry Week identified Brownsville as America’s sixth-fastest growing manufacturing region. The same survey gives Brownsville the highest rating of any other border city (55th out of 310 U.S. metro areas) as a good place to do business.
Members of Brownsville’s industrial community include Fortune 500 companies such as MagneTek, Levi Strauss, General Motors, AT&T, ITT Automotive, DuPont, Allied Signal Corporation, Rohm and Hass, and Parker Hannifin.

Key to Brownsville’s overall economic health is its strong relationship with sister city Metamoros, home of thriving maquiladora activity. According to the Brownsville Chamber of Commerce, about 50 companies employing 1,200 people have located their operations here to support maquiladoras.

The city’s biggest manufacturers include Trico, a wiper blade maker with plants in both countries; and Keppel Amfels, a Singapore-based maker of offshore oil rigs on this side of the border. The latter employs between 3,000 and 5,000 workers each year.

Interestingly enough, over a decade ago a local oil rig repair firm closed down, leaving behind a large, well-trained workforce which Keppel Amfels eagerly tapped into upon its arrival.

The future looks bright for Lone Star State manufacturing firms, including those located throughout South Texas.

Recent FRBD surveys indicate Texas manufacturers are reporting improved conditions, and slow but steady expansion. Specifically, many companies expect increases in production, capacity utilization, shipments and volume of new orders later this year.

Texas will always symbolize the romantic Old West. But as more businesses worldwide discover its many economic development advantages, a new image is emerging firmly identifying the state as a land of unparalleled manufacturing opportunities.  

Lisa A. Bastian, CBC, is editor of Business SouthTexas, and president of IABC/San Antonio.